Change the Rules, Change the Future

In 1997, as the Kyoto Protocol on Climate Change was being negotiated, the U.S. Senate voted, 95-0, to reject any agreement that "would result in serious harm to the economy of the United States." The senators were acting on the widespread fear that the transition from fossil fuels to clean energy would hurt American businesses and cost millions of jobs. Those were the beliefs and the politics of the times.

But times change. Ten years later, it's increasingly clear that it will be more costly not to act on global warming than to act. Clean, renewable, efficient energy will not be a burden but a boon -- the next in a series of revolutions, beginning with telecom and digital that have invigorated our economy with new ideas, new industries, and new jobs.

Voters, investors, activists, business leaders, and policy experts are pushing for clean energy to create jobs, limit climate change, and reduce America's dependence on foreign oil. And yet, progress is slow: oil imports and carbon emissions continue to rise. Why?

Because the rules of the game -- the laws, regulations, subsidies, and tax credits that shape the energy market and the way it acts -- continue to make fossil fuels a less expensive, more convenient choice for consumers.

These rules are both the heart of the problem, and the key to a solution.

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In 1931, Thomas Edison met with Henry Ford, whose popular cars were driving up demand for gasoline, and told him: "I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that."

Seventy-four years later, the three largest technology IPOs of 2005 were solar-energy companies. We're finally catching up with Edison.

Bill Joy, the founder of Sun Microsystems, says that clean energy is where we'll find "the Googles, the Microsofts of the new era." Venture capitalist John Doerr -- whose firm, Kleiner Perkins, got rich investing early in companies like Google, Amazon, and Sun Microsystems, has called clean energy "the largest economic opportunity of the 21st century."

They base these predictions, in part, on advances in technology. Wind power now costs about 5 percent of what it did 25 years ago. Solar energy costs are down more than 90 percent since 1970. The National Renewable Energy Laboratory says that the price of renewable energy will drop another 45 percent over the next 20 years. Indeed, this estimate may be low, given that scientists like Craig Venter, who cracked the human genome, and Steven Chu, who won the 1997 Nobel Prize for Physics, have turned their attention to clean energy.

Support for a new energy future is coming from everyone from evangelicals like Pat Robertson, who believe we have to preserve God's creation; to union leaders, who see the opportunity for new jobs; to farmers, who know wind and biofuels will boost their income; to policymakers like Republican Sen. Richard Lugar (R-Ind.), who says we must reduce our dependence on oil "in the interest of American national security and our economic future."

It even includes business leaders like the CEOs from DuPont, GE, and Duke Energy, who earlier this year called for tough federal limits on global-warming emissions -- a call that was echoed in March by institutional investors managing $4 trillion in assets.

Ten Northeastern states are implementing a regional cap-and-trade system to reduce CO2 emissions. And the California legislature has required the state to cut its greenhouse-gas emissions 80 percent by 2050.

But in spite of this momentum for change, our energy habits are still stuck in the past. Carbon dioxide emissions are up 19 percent since 1990 and still rising. Oil imports are up 70 percent since 1990 and still rising. Renewable sources like solar power and biofuels provide just 6 percent of America's energy -- and that share is not rising.

What's wrong? Big majorities of Americans want clean energy for its national security and environmental benefits. Why aren't we moving faster toward a clean energy future?

Huge society-wide change comes only when millions of consumers change their habits, and consumers will not change their energy habits until we reach the "crossover point" at which clean energy beats coal and oil on the basis of price, convenience, and availability.

Right now, most drivers cannot pull into a gas station and fill up with domestically produced biofuels. Most homeowners cannot choose wind- or solar-generated electricity to power their appliances. Going green too often costs more -- in time or money.

Change won't come until the price is right. That price is set by the market, the market is shaped by rules, and the rules favor fossil fuels.

If we want to change the future, we have to change the rules.

Rules Matter

Rules matter. Rules define the character -- and shape the future -- of the society that makes them. Democracy's distinguishing excellence lies in its ability to write the rules in a way that serves the common interest.

Good rules align the interests of individuals and corporations with the public interest, so that business can profit in ways that also make society richer and safer. This is the foundation of sound public policy. When high purpose is combined with the profit motive, the results can be astonishing. Time and again market capitalism, bounded by smart rules designed to serve the public interest, has delivered the desired result more cheaply, quickly, and easily than anyone thought possible.

Unfortunately, rules that are passed to advance the public interest can come, over time, to harm the public interest.

The rules we have now encourage the use of energy -- especially oil and electricity. For most of the 20th century, this was smart policy. Electrification of the U.S. economy produced huge gains in productivity and quality of life. The increased mobility of people, goods, and services had similar benefits. Using more energy did not make us dependent on foreign oil. As late as 1940, the U.S. produced 63 percent of the world's oil, compared to the 5 percent that came from the Middle East.

But the world is very different today. Geologists estimate that the Middle East has over 60 percent of the world's oil reserves, the U.S. just three. And carbon dioxide emissions from our power plants and vehicles are wrecking the world's climate. The rules need to change.

The rules today give oil and gas companies -- the most profitable industry in the history of the world -- billions of dollars in tax breaks and research subsidies. The rules do not factor in the indirect costs of oil -- the cost of protecting oil supply lines to the Middle East, the cost of oil price shocks that lead to recessions, and the cost of intensified storms that make coastal property uninsurable. Insurers have priced insurance in Florida so high that the state has stepped in and pledged tens of billions of dollars in public money if a major hurricane strikes -- despite the fact that neither the state's catastrophe fund nor the state-chartered insurance company has anywhere near enough money to pay the claims.

The rules perpetuate our energy habits. Auto companies sell cars that get as little as 13 miles per gallon -- something they could never do in Europe, Japan, or even China. Utility companies make more money when their customers waste energy and less when they save it. Developers build with energy-inefficient materials because they don't have to pay the utility bills. And power plants use the atmosphere as a free garbage dump for their global-warming emissions.

We need new rules that will make the best choice for the country also the best choice for consumers.

We don't have to undo investments we have already made. We don't need to take old cars off the road or shut down coal-fired power plants prematurely. But the next investments we make -- the next cars and buildings we design, the next power plants we build -- should follow new rules that reflect our need for clean, renewable, efficient energy.

Changing the rules to unleash the power of the market is not a new idea. Until 1984, telecommunications in the United States were monopolized by a single company: AT&T. For a time, that was sound policy. It ensured dependability during the early years of the industry. Customers bought their phone service and rented their phones from Ma Bell. But when rivals emerged, the government and the courts changed the rules. The market took over, and the telecom revolution began.

Phone sales jumped from 19.7 million in 1983 to 30.3 million in 1984. New features like call waiting and call forwarding proliferated. From 1984 to 2001, AT&T's share of the long-distance market declined from 90 percent to 38 percent as competition drove down prices. New producers of telecommunications technologies like switches, microwave antennas, cables, and modems began to thrive.

Today, we are on the cusp of a similar revolution in energy, but the old rules are still in place. There is a lot of money ready to invest, but too few good investment opportunities. To enable those emerging products and technologies to succeed, the most important thing we can do is change the rules.

Consider the recent case of Xcel Energy, a Minnesota utility that wanted to build a new coal plant. When the state utility commission asked Xcel to recalculate the cost of running the plant with an $8-per-ton cost for carbon emissions, the company did so -- and then abandoned its plan for the coal plant. Instead, it will rely on wind generation and hydropower. A spokesperson said that the prospect of a carbon fee helped prompt the decision, and the company now advocates mandatory standards for reducing greenhouse gases.

In this case, just the anticipation of a rule change created a market incentive for Xcel to make its next investment in a way that favored new technology.

Because the challenges of climate change and oil dependence are so urgent, when we make this transition matters just as much as whether we make it. Sooner is better -- much better -- particularly if we want to be one of the countries that sells these new technologies.

The New Energy Competition

Many of our economic competitors are moving more quickly than the United States to capitalize on the new jobs and new industries that will come with clean energy -- Japan and Germany in particular.

Japan, which has very limited fossil-fuel resources, has supported solar energy with government research-and-development funds and a decade-long subsidy for consumers who install solar panels. Germany, since the late 1980s, has supported wind and solar energy with tax breaks and a tariff that guarantees renewable-energy producers a competitive price. Cornelia Viertl, a senior adviser at the German Federal Environment Ministry, explains: "We feel there's a chance for Germany to be innovative, to create an industry and possibly be the leader."

Because of their rules, our competitors are farther along than the United States in the transition from old energy to new energy, and they have captured most of the growth and jobs along the way. Just 10 years ago, the United States produced 44 percent of the world's solar cells; today its market share is less than 10 percent. Japan is now the world leader, producing 43 percent of the world's solar-energy products. Europe, meanwhile, produces 90 percent of the world's wind turbines. Brazil, where the government requires all gasoline to contain ethanol, has led the way on biofuels.

Even Abu Dhabi is getting into the game. The oil-rich emirate recently pledged hundreds of millions of dollars toward developing alternatives to fossil fuels. In the past year, it has announced plans to build a 500-megawatt solar power plant -- the first in the Middle East -- and has also announced a partnership with MIT to develop a research center for the study of clean energy technology. They're not just out to get the industries and jobs that we want here, they're using our oil payments and our intellectual power to help them do it.

We still have a chance to reassert our leadership. Our educated workforce, top-level universities, and culture of innovation still position us to capitalize as the world moves to clean energy. We have to decide whether we're going to lead the world -- and claim the economic benefits -- or follow, and send money to other countries for clean energy technology, in the same way that we now send money to the Middle East for oil.

The Rule Changes

The future of energy is not terribly complicated to envision:

• Clean energy: We'll use new, renewable sources of energy: more biofuels and less oil, more wind and solar, and less coal and natural gas.
• Energy efficiency: Our homes, office buildings, cars, and appliances will require less energy, and we'll have better ways to manage that use.
• Carbon capture: Emissions from coal-fired power plants will be captured and pumped underground.
• A "smarter" grid: Digital technology will finally come to the electric power grid, making it more efficient, more reliable, and better able to draw on renewable resources. It should become a national grid, like our highway system, so any renewable or non-renewable electricity generated in any part of the country can be transmitted to market.

President Bush addressed the first two goals in his State of the Union address in January. His "20 in 10" initiative called for U.S. vehicles to use 35 billion gallons of alternative fuels by 2017, and he also suggested that fuel economy standards could be increased by 4 percent a year over the next decade. On May 14, he directed four federal agencies to take action toward this goal. These are steps in the right direction, but we have a long way to go.

Here are five more rule changes that would reduce emissions, give consumers new choices, launch new businesses, and accelerate the profitable transition to new energy technologies:

Put a price on carbon.

Putting a price on carbon dioxide -- through a cap-and-trade system similar to the one that reduced acid-rain pollution at low cost -- would end the use of the atmosphere as a free garbage dump and create a market for any technology that reduced global-warming emissions.

Just as important, a cap-and-trade system would give businesses the basis for making capital investments in cleaner energy research, technology, and capital stock. As Elizabeth Moler, an executive at Exelon, one of the nation's largest utility companies, said last year: "We need the economic and regulatory certainty to invest in a low-carbon energy future."

Carbon limits should be broad-based, predictable, and achievable. A simple reduction of 1 percent of our carbon emissions each year would capture the public imagination and unify individuals, families, corporations, and government behind this crucial national goal. The goal might need to be strengthened over time, but it would be a strong start.

Set "carbon efficiency" standards for vehicles.

The debate over fuel efficiency standards has bogged down in finger-pointing between Washington and Detroit. To break the impasse, Congress should pass tough standards for "carbon efficiency." If companies had to reduce the average carbon emissions of their fleet, it would encourage them not only to build lighter, more efficient vehicles, but also to build cars that can run on biofuels and on electricity -- rather than simply updating the internal combustion engine. California has recently taken the first step in this direction. This is the technology of the future, and it is where Detroit should be making its investments.

At the same time, Congress or the U.S. EPA should require oil companies to phase out the harmful additives in their gasoline. In the 1970s, when Congress required the elimination of lead in gasoline, oil companies turned to additives called "aromatics" -- benzene, toluene, and xylene -- to give engines the added octane they used to get from lead. Today, these toxic additives make up more than a quarter of every gallon of gasoline. Their use creates airborne particulates, which cause thousands of premature deaths every year and may be related to the unexplained urban epidemic of asthma among children.

Removing these additives would take some of the "kick" out of gasoline. But that would just be another incentive for motorists to turn to biofuels -- which have the power to replace the octane now supplied by aromatics. With this one rule change, we would not only make the air cleaner and improve public health, we would also create additional demand for the next generation of biofuels, made from non-food crops like prairie grasses -- so-called cellulosic ethanol -- which contribute almost nothing to global warming.

Make energy efficiency the business of utilities.

Today, in almost every state, utilities make more money as their customers use more energy. We should flip those incentives. Utility companies in California are compensated for helping their customers reduce their energy use. They make money by helping customers install better insulation and use more energy-efficient products. When a utility can make more money helping people save energy rather than use energy, that's a smart set of rules.

We should go one step further and allow utilities to profit by investing in energy efficiency directly. Today, new windows have three times the insulation value as old ones, and new air conditioners use 30 percent to 40 percent less energy than models that are just 10 years old -- but they are rarely installed in new homes, because home builders don't have to pay the utility bills. Even the new homebuyer may only plan to live there for a few years and may not want to invest in energy efficiency.

For utilities, however, a new building is a 50-year energy obligation, and permanently reducing its energy use should be treated as a 50-year asset. Utilities should be able to earn a return on structural investments in energy efficiency just as they do in a new power plant. Indeed, because home-based renewable-energy systems have the effect of reducing demand, utilities should be compensated for buying solar panels and geothermal heat pumps, which will cut a building's energy consumption for decades.

Modernize the electric power grid to be more efficient and better deliver clean energy.

Nearly every sector of the economy has been made more efficient with the introduction of information technology -- but not the electric power grid, which still operates on 50-year-old technology. A modernized, digitally connected national electricity grid will be more secure, reliable, and resilient, allowing quicker restoration of power after outages and the ability to avert large-scale blackouts. Renewable electric power should be given priority access to such a grid.

A modern grid will also be able to manage intermittent power flows from renewable-energy sources and give producers -- from farmers with wind turbines in their fields or homeowners with solar panels on their roofs to large solar farms in the desert -- a better opportunity to sell electricity back to the grid. Instead of relying only on a few, traditional power plants, utilities will be able to get electricity from a network of clean power providers, which would not only make clean energy more widely available to consumers, but also make the energy supply more stable and secure.

By allowing remote control of energy demand, a modernized grid will also reduce the need for new generation and cut costs to consumers. It will also create new economic opportunities that are unpredictable today, just as other networks -- the interstate highway system and the internet -- did before.

Increase government support for clean energy.

No industry of any consequence to the country has grown and thrived without government support. According to the Government Accountability Office, the oil industry alone received more than $140 billion in subsidies and tax breaks between 1968 and 2000. In the 21st century, the U.S. government has just as much interest, if not more, in the success of clean energy.

That's why the government should boost incentives and dramatically increase R&D spending for clean energy -- in line with its importance to the national interest. Last year, the federal government spent less than $2 billion on energy R&D -- just one-third what it spent 25 years ago, adjusted for inflation. During the same 25-year period, government medical research is up nearly 300 percent to $28 billion, and government military research is up 250 percent to $75 billion.

A major chunk of new money, ironically, should go to a fossil-fuel technology -- coal -- to enable power plants to capture their carbon emissions and bury them underground. Coal can continue its large role in meeting the nation's power needs only if its global-warming emissions can be sequestered. A greatly intensified program of research and development is needed in this area. Another chunk of new money should go to utility-grade renewable technologies like solar thermal power plants to create a clean energy horse race.

It's also crucial that the government invest not only in research and development, or R&D, but also in the other Ds -- demonstration and early deployment. The engineering challenge of applying new technologies is just as important as the scientific challenge of discovering them -- and government needs to fund both aggressively.

To pay for this work, we can cut back our handouts to the oil companies. It is certainly arguable that all subsidies to oil companies should be eliminated -- but at the very least, we should cut off taxpayer support when the price of oil rises above $50 a barrel. President Bush himself has said, "With oil at more than $50 a barrel, by the way, energy companies do not need taxpayers'-funded incentives to explore for oil and gas."

Tying subsidies to price is only common sense. Just as tax breaks for oil should be phased out as the price rises, subsidies for clean energy should be increased as the price of oil falls, and reduced or eliminated if oil stays near current levels. Last year at the World Economic Forum in Davos, Switzerland, a Saudi official warned: "If biofuels start to take off, the price of oil could drop." Linking alternative energy subsidies to the price of oil would signal to oil suppliers -- and OPEC in particular -- that predatory pricing would be futile. Within a decade, clean alternatives to oil will not need subsidies if the scale of markets is large enough.

Changing the rules on subsidies responds to the threats of oil dependence and climate change. Today the rules favor fossil fuels. For the sake of the country, it's time to switch. If clean energy doesn't win, we all lose.

These five rule changes will help build a market-based system in which companies and consumers can advance the national interest by acting in their own self-interest.

All the arguments against action -- from "global warming is not proven" to "India and China have to go first" -- share the same assumption: that accelerating the move to clean energy will impose huge economic costs on the country. That's a false premise. As soon as we get the rules right, we will create a multibillion-dollar market for new products and technologies here in this country. The sooner we create that market, the sooner companies will emerge to profit from it. Any delay simply forfeits an economic advantage to countries that are more far-sighted in setting their rules.

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Nearly 30 years ago, President Carter went on national television and told Americans to turn down their thermostats and put on their sweaters. The message Americans received was one of sacrifice: reduce your energy use and your quality of life.

We saw how well that worked.

People are willing to embrace sacrifice in the midst of an urgent and obvious crisis -- but only if they see their sacrifice as a solution, and only if there is an end in sight. That is not the situation we face. To meet today's energy challenge, hundreds of millions of people must change their habits -- not just for a few months or a few years, but forever. That makes our options clearer.

We can try to scold people into embracing sacrifice -- and change nothing -- or we can offer the kind of choice that can change the world, which is choice that is cheaper, cleaner, better. Choice is what markets do best, but not if government is standing in the way with old rules that favor the industries of the past.

Climate change and oil dependence are pushing us toward a clean, renewable, efficient energy future. The profits to be made in making and selling these technologies are pulling us in the same direction. With one strategic leap, we can wipe out two of the biggest threats to our children's well-being while creating the high-tech industries that will employ them in the future.

If we just change the rules.


Timothy E. Wirth is president of the United Nations Foundation and a former U.S. senator and undersecretary of state for global affairs. Vinod Khosla is the founding partner of Khosla Ventures and remains an affiliated partner of Kleiner, Perkins, Caufield, & Byers; he was the founding CEO of Sun Microsystems. John D. Podesta is president and CEO of the Center for American Progress and served as White House chief of staff under President Bill Clinton. All three are members of the steering committee of the Energy Future Coalition.